Investment Banking Customary Terms

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In the first of our three part series we walked you through the process of deciding whether to hire an investment banker for your middle market business (i.e. transaction valued between $25 million and $250 million). So now that you have decided to sell your business, we will discuss customary investment banking terms in this article and will wrap up the series next quarter with a review of customary investment banking fees.


An easy rule for the retention of any professional service provider, including investment bankers, is to specifically identify the people that will be working with you. The name and reputation of the investment banking firm is important but the key is the lead investment banker and his or her team. The best investment bankers will have in-depth industry experience, know the senior people of the likely purchasers and be able to contact them directly by phone. The lead banker should also be able to relate to your needs and goals and should be surrounded by a bunch of young MBAs who can write a wonderful story about your business and crunch numbers in magical ways. The investment banking agreement should set forth the expectation of each banker's role and should allow for an early termination of the agreement if the key investment banker leaves the firm or does not perform as promised.

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The investment banking agreement should include a proposed time line for all deliverables in the form of a gant chart. This includes information that must be produced by you and delivered to the investment banker, the “book” to be written by the investment banker, the approach (auction, private sale or a hybrid of both) and timeline for the investment banker to contact prospective purchasers and the process and time line to bring a prospective purchaser to closing. Do not leave this to chance or to vague promises of speed. A well thought out, well documented plan in the investment banking agreement assists everyone in working through a complex and often anxiety filled process.

The engagement letter should describe the types of “covered transactions” for which the investment banker will be entitled to receive a fee. For example, sellers often want to exclude from the investment banking agreement one or more parties which have already engaged in discussions with the seller. Investment bankers reject this concept and the best investment bankers will walk away from a deal rather than accept such a term. We agree with the investment bankers on this issue. For the investment banker to maximize a seller’s value, the banker must create some type of competitive bidding. If one or more of those bidders is excluded from the investment banking fee, the investment banker would naturally try to guide the seller away from that bidder. This would be unproductive. Our view is that if you can sell your business without an investment banker, do it. But if you retain an investment banker, align his or her interests with yours by paying a fee for any sale, even if the sale is to a party you already knew and had discussions with.

There are also various other carve outs that a seller might consider, including selling a minority interest rather than a controlling interest or sourcing capital or debt and continuing a business rather than selling it. These situations tend to be unique and there is no standard advice. Best practices are to think through all possibilities prior to entering into an investment banking agreement, identify special situations if possible and most importantly understand (see next section) the period of time during which an investment banker would receive a fee.

For most middle-market deals, the term of the engagement letter is six months to one year. The investment banker will require a “tail period” which provides that the banker will receive a fee if a transaction closes within a certain amount of time after the investment banking engagement ends. Tail periods run anywhere from 6 months to 2 years, with most tails falling between 6 months and one year after the end of the engagement.

The most important aspect of the tail is to limit it to potential buyers brought into the process by the banker. We believe that the banker should get written approval from the seller before contacting any potential buyer. This written approval assures the seller that the banker is not contacting anyone that the seller does not approve and creates the list of those parties covered by a tail.

The engagement letter will provide that the seller will indemnify the investment banker from any claims arising from the sales process other than those resulting from the investment banker’s gross negligence or willful misconduct. Quality investment bankers will not negotiate the indemnity provision in any meaningful way.

Our experience is that terms vary among investment banking firms but industry norms have been established and the negotiation of terms is generally not difficult. Fees are a totally different issue. Stay tuned.

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